More often than not, people associate success with money and wealth.
While that is a lopsided view of success, it is true that success often brings with it financial rewards; it is also true that many people who aspire to success are thinking of the financial rewards that will follow when they succeed. But what if your idea of success is purely financial? In that case, it could be that you are looking for a financial success system that will help you achieve your financial objective.
In most respects, your personal finances are no different to a business’s finances. The underlying principles are the same. I can assure you that the way a company’s or organisation’s finances are, or should be, run is fundamentally similar to the way your own finances should be run.
Every company will have systems in place that are designed to further the success of the company, as well as protect its assets from misappropriation. In effect, they put in a financial success system that should enable them to run the business profitably and by so doing build assets.
The main elements of a company’s financial system can quite easily be recognised as good practice in your own personal financial system. The statutory requirements are quite different, but from a financial management point of view there are some helpful similarities an individual can learn from.
If you apply some of the following business finance fundamentals to your own approach to personal finance, then over time you will develop a finance success system that will grow your wealth for the rest of your life.
Setting and managing budgets is a routine part of any business; they are a key tool in financial control. A home budget is vitally important too. Get into the habit of setting and monitoring your personal budget of income and expenditure, and you will have the foundation of a financial success plan.
2. Investment Appraisal
Whenever a company decides to spend money on a large capital item or new product, for example, it may carry out an investment appraisal. You will not have such large spending decisions to make, but the important thing is to consciously assess the expenditure. Will it build your financial success or hinder it? For example, if you are buying a car, which will depreciate, there is a high risk it will diminish your personal assets significantly and set back your finance success plan. When it is time to indulge, be sure it is the right time.
3. Building Assets
A company builds assets by consistently being profitable, investing wisely, and developing the business at a sensible and sustainable pace. Being profitable is earning more revenue than you spend in expenditure. The same is true of you as an individual; always ensure you earn more each month than you spend. The balance (savings) goes into your spare assets, which can build over time, especially with sound investment.
4. Balance Sheet
Creating a balance sheet in a large business can be quite complex. A simplified version may help you keep an eye on your own asset status. Preparing a rough balance sheet once a year, showing your assets on one side and liabilities on the other, will give you an idea of your personal worth, in financial terms. By comparing year on year, you can ensure you are making progress.
If you use a home budget software program, it may have a balance sheet facility to help you.
5. Regular Financial Reporting
Companies have a legal obligation to produce accounts each financial year. Your legal requirements are for your personal tax purposes only.
However, a business does not rely just on annual accounts, and nor should you. It is likely they will have management accounts on at least a monthly basis, to allow management to keep track of the way business is progressing. You should also follow that example. Keep a close watch on your budget each month, and react accordingly.
6. Cash Flow Forecasting
Even a profitable company can have problems keeping going if it does not manage its cash flow properly. In fact, it is a common reason for companies to cease trading. As part of your budgeting, ensure you incorporate cash flow forecasting, that way you can allow for peaks and troughs in income and expenditure without hitting problems with paying bills on time.
Missing payments can prove expensive to your overall wealth, so is best avoided at all times.
7. Investment and Treasury
If all goes according to plan, you will have surplus cash. A company will have a treasurer for that, but in your case that treasurer is you. Take that role seriously, and over time you will be a financial success. If you have a partner, it makes sense to involve them in this, and other parts of your plan for financial security.
Investment is a fascinating subject, so if you can learn about it, you will be well placed to do better than an average investor. Investment is about balancing risk and return, and if you can master that without taking silly risks, you should do well financially.
On top of those purely financial aspects, there are other key areas to a business that will affect finances that you could learn from:
Keep an eye on the marketplace for the type of success you are seeking and your areas of expertise. Try to anticipate how that market may develop and prepare yourself ahead of everyone else. You are worth more if you are ahead of the game, whatever field you may be in.
2. Education and Training of Key Personnel
As an individual, the more you educate yourself about different aspects of life, both personal and commercial, the better placed you are to become wealthy. Never become complacent about your own knowledge; over time it will decline in importance, so you need to refresh it constantly. Train yourself, educate yourself, continuously.
Those are just a few ideas of how you may use business finance practices to build your own financial success over the long term. Follow those, and you won’t go far wrong, and prepare yourself for a rebound should anything ever go wrong, such as redundancy or divorce, which can scupper even the best of financial plans.